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Charitable bonds

How to use long-term debt to finance growth – a type of social investment

What does it mean?

Charities and social enterprises can issue bonds as a form of long-term debt to expand business operations.

Who might use it?

An organisation may be able to issue bonds if it has a viable underlying source of revenue with which to repay the bond holders (e.g. an organisation which operates a chain of charity shops).

As this form of finance is still emerging in the social sector, there are various types of bonds in existence:

The bonds issued by Allia combine an investment to an AA-rated social housing provider, which repays the loan with interest and additionally provides a grant to a charity.

Investing For Good is assisting Scope to become one of the first UK charities to enter the capital markets. It is piloting a £20 million bond programme operating similarly to corporate bond products and listed on an exchange in Luxemburg.

Triodos Bank is assisting the community interest company Bristol Together plan a bond issue worth £1.6m. The first £600,000 was bought by a Foundation and the second tranche of £1m will be sold to private individuals to attract Community Investment Tax Relief, which allows investors to reduce their tax bills by 5 per cent a year for five years.

In some cases, investors may also receive the repayment in non-monetary terms, such as the goods and services provided by the enterprise.

This segment of the market is still evolving, and new varieties of charitable bonds are continually emerging.

Who provides it?

Allia can support organisations with charitable bonds, that release an up-front, tax-free gift to the charity.

Investing for Good hopes to use a well-understood and established mainstream financial product for the purposes of driving more mainstream capital into the social investment market.

Triodos Bank can be the lead adviser for an organisation hoping to raise finance through a bond issue.

Case study - Scope

In October 2011, Scope announced a £20 million bond programme to generate complementary funding for its charitable activities alongside current donations and philanthropic loans.

The programme will allow Scope to expand its income generating activities such as its network of charity shops, which generate long-term sustainable sources of income for its work with disabled people.

They are working in partnership with Investing for Good, a specialist social finance intermediary.

The Bond will operate in the same way as similar corporate bond products, allowing high net worth individuals, foundations and institutional investors (e.g. wealth and pension fund managers) to invest their capital in a charity for both social and financial return.

It’s a flexible programme that allows Scope to raise as much finance as they need for as long as they need – and it’s unrestricted, so they can choose how they use it. They will have the flexibility to issue sterling bond tranches at varying nominal amounts; for example, the first trance of debt they will raise from the market is £2m, which is well within their resources to repay. Scope reports income of more than £100m a year with £23m of that coming from its charity shops, £15m from donations and the rest from providing services to the public sector. About 3,000 people are employed by Scope which made a surplus of £4m in 2010.

The bond is firmly placed as a commercial activity and Scope are offering a fairly standard return based on their enterprise activity, rather than the social outcomes of their programmes, giving investors certainty over their financial return.

"The major cash investment that we hope to generate through the Scope Bond Programme has the potential to transform the support we can provide to disabled people," said Richard Hawkes, chief executive of Scope.

"It gives us the opportunity to talk to a new and emerging network of prospective supporters and offer them an additional way of investing in Scope alongside traditional donations and philanthropic loans. This is a landmark development for Scope and could revolutionise the way we and other large charities raise finance for our work in the future."

The Scope Bond Programme is listed on the Luxembourg-based Euro MTF stock exchange and follows Scope’s Grangewood Venture Philanthropy Project, where outside investors were brought in to finance the construction of homes for people with multiple disabilities.